Dell earnings jump as costs fall, services climb

PC maker also raises earnings forecast for fiscal year

DanGallagher

SAN FRANCISCO (MarketWatch) — Dell Inc. said Tuesday afternoon that earnings surged in the first fiscal quarter on a mix of cost reductions and improved service revenues.

Dell

Dell was able to offset slowing sales of desktop PCs with growth in other areas.

Shares of Dell
DELL
rose nearly 5% in after-hours trading following the report; the stock closed the day down slightly at $15.90.

The company said it expects revenue for the current period to come in above its normal seasonal levels, as several factors may give its PC business and other units a lift in the period.

Operating income surged by 134% from the same quarter last year. On a conference call, Dell executives said improved focused on higher-margin services and products are improving the company’s profitability.

“As we transition to more Dell-owned IP, we’re selling higher value and more differentiated products, and we’re having deeper conversations with our customers about their technology challenges and opportunities,” chief financial officer Brian Gladden said on the call. “As such, we’re capturing a growing share in the faster growing segments of the IT market.”

For the quarter ended April 29, Dell reported net income of $945 million, or 49 cents a share, compared with net income of $341 million or 17 cents a share for the same period last year. Revenue grew by 1% to $15 billion.

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On a non-GAAP basis, the company said it would have earned $1.05 billion, or 55 cents a share, for the recent quarter.

Analysts were expecting earnings of 43 cents a share on revenue of $15.4 billion, according to consensus forecasts from FactSet Research.

The company reported a decline in sales of desktop PCs that was offset by growth in its server line. Dell’s results came the same day that arch-rival Hewlett-Packard Co.
HPQ, -1.42%
lowered its forecast for the current year, citing a slowdown in PC sales and weakness in its services business. Read full report on H-P's results.

PCs made up about 53% of Dell’s total revenue base for the quarter. Server sales jumped 11% to $1.97 billion.

Business spending provided the main source of upside for the quarter, as large enterprise revenue grew 5% while small and mid-sized businesses, or SMB, revenue grew by 7%. Consumer sales fell by 7% for the quarter.

Product costs fell by 9%, helping to boost gross margins for the quarter by 36% compared with the same period last year.

Dell did not give a specific forecast, but said it expects “mid-single-digit revenue growth” in its second fiscal quarter, which is slightly above its normal, sequential seasonal growth of 2% to 3%.

The company expects to benefit from fiscal-year closeout spending by the government, as well as from the timing of demand for devices with the new Intel Sandy Bridge chip. Dell also said it anticipates a “solid consumer back-to-school spending season.”

In addition, Dell raised its earnings forecast for the fiscal year. The company said it now expects non-GAAP operating income to grow 12% to 18% for the year, compared with its previously predicted range of 6% to 12%.

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